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Three refineries, including two owned by Philadelphia-based Sunoco Inc. that have supplied about half of the gasoline, diesel and jet fuel, have already closed in just the past six months. They had lost nearly $1 billion over three years after shelling out $1.3 billion to comply with stricter EPA rules at a time when demand for gasoline fell and the cost of foreign crude soared.

Sonoco also worried that those regulatory costs would grow exponentially under the Obama administration through stiff noncompliance fines and other penalties that have hit other refineries. Its 2011 report filed with the SEC stated that: “Compliance with current and future environmental laws and regulations will require us to make significant expenditures, increasing the overall cost of operating our business, including capital costs to construct, maintain and upgrade equipment and facilities.” It went on to say: “To the extent that these expenditures are not ultimately reflected in our products or services, our operating results would be adversely affected.”

Sonoco terminated operations at its Marcus Hook, Pennsylvania plant last December, and now plans to halt production at its Philadelphia facility. ConocoPhillips shut down its Trainer Pa. plant last September.

Although The Colonial Pipeline Company which pipes gas underground from Texas to the East Coast plans to expand capacity to help meet demands, that won’t nearly fill the deficit. After being hit with the largest EPA fine in history, and now laboring under even tougher rules, they have little incentive to build more pipelines. Nor does Kinder Morgan, the other pipeline operator serving the region.

Oil and gas companies have good reason to worry about costly punitive EPA practices under the Obama administration. Their Dallas Regional Administrator, Al Armendariz, expressed this take-no-prisoners philosophy at a taped city council meeting two years ago. The strategy described was to single out an oil company accused of a rule infraction and “punish it as hard as you can” as an example to scare others into submission. He explained: “The Romans used to conquer little villages in the Mediterranean.” Armendariz continued, “They’d go into a little Turkish town somewhere, they’d find the first five guys they saw, and they would crucify them. And then you know that the town was really easy to manage for the next few years.”

As part of a late 2010 settlement with several states and environmental organizations, EPA had originally planned to release new refinery regulation rules by mid-November, but it now appears that this will be delayed until after the presidential election. At a February House Energy and Commerce Committee meeting, EPA Administrator Lisa Jackson signaled that the matter has been placed on a slow track, stating, “We have always had plans that we would go from the largest stationary [greenhouse gas emissions] source, which is utilities … to the next largest, which is refineries.” She told reporters that while “…there are no current rules under development on that issue, the agency is still planning to craft the standards.”

The Oil & Gas Journal reported that a Baker and O’Brien study commissioned by the American Petroleum Institute last year found that, in addition to CO2 emission restrictions, EPA’s sulfur reduction requirements could also have significant adverse impacts on refinery operations. Initial costs could reach $17 billion, with recurring costs of between $5-13 billion, translating to higher product costs of around 5-35 cents/gallon of petroleum. Such added costs could lead to a reduction of gasoline supply from U.S. refiners of up to 14%, placing domestic refineries at a competitive disadvantage with foreign refineries that are not subject to EPA rules.

Over the past 60 years, the U.S. has seen the number of refineries cut almost in half, down from 324 to 149. The last facility to be constructed, the Ashland refinery near Garyville, Louisiana, was completed in 1976. As a result, disruptions of production due to maintenance, accidents and natural disasters at one or more plants can create shortfalls and price hikes with regional and national impacts. A big reason is because they are high on the list of least-wanted industries in many locales. In California, ten plants representing 20% of the state’s refining capacity, were closed between 1985 and 1995. It is unlikely that more will be built due to concerns about smog, truck traffic carrying hazardous materials, and potential leaks in the event of earthquakes.

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